3. Income taxes
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millions of Canadian
dollars |
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2017 |
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2016 |
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2015 |
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Current income tax expense (a)
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(58 |
) |
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200 |
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451 |
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Deferred income tax expense (a) (b)
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150 |
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79 |
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350 |
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Total income tax expense (a) (c)
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92 |
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279 |
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801 |
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Statutory corporate tax rate (percent)
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26.9 |
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26.8 |
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27.2 |
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Increase (decrease) resulting from:
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Disposals (d)
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(5.3 |
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(11.6 |
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(0.4 |
) |
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Enacted tax rate change (a)
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0.9 |
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- |
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16.1 |
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Other
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(6.6 |
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(3.8 |
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(1.2 |
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Effective income tax rate
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15.9 |
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11.4 |
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41.7 |
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| (a) |
On November 2, 2017 the British
Columbia government enacted a 1 percent increase in the
provincial tax rate from 11 percent to 12 percent. On
June 30, 2015 the Alberta government enacted a 2 percent
increase in the provincial tax rate, from 10 percent to
12 percent. |
| (b) |
There were no material net (charges)
credits for the effect of changes in tax laws and rates included in
the provisions for deferred income taxes in 2016. |
| (c) |
Cash outflow from income taxes, plus
investment credits earned, was $322 million (2016 -
$172 million, 2015 - $202 million). |
| (d) |
2017 disposals are primarily
associated with the sale of surplus property in Ontario. 2016
disposals are primarily associated with the sales of company-owned
Esso retail sites and the general aviation business. Capital gains
tax treatment was applied on the majority of disposals. |
In 2017 and 2016, the decrease in the statutory tax rate in the
other category mainly represents prior year adjustments
and re-assessments.
Deferred income taxes are based on differences between the
accounting and tax values of assets and liabilities. These
differences in value are re-measured at
each year-end using the
tax rates and tax laws expected to apply when those differences are
realized or settled in the future. Components of deferred income
tax liabilities and assets as at December 31 were:
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millions of Canadian
dollars |
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2017 |
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2016 |
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2015 |
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Depreciation and amortization
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5,564 |
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5,361 |
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4,677 |
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Successful drilling and land acquisitions
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762 |
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891 |
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922 |
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Pension and benefits
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(422 |
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(457 |
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(396 |
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Asset retirement obligation
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(376 |
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(396 |
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(406 |
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Capitalized interest
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118 |
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114 |
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104 |
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LIFO inventory valuation (a)
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(318 |
) |
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(240 |
) |
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- |
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Tax loss carryforwards
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(936 |
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(1,056 |
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(610 |
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Other (a)
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(196 |
) |
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(212 |
) |
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(100 |
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Net long-term deferred income tax liabilities
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4,196 |
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4,005 |
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4,191 |
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LIFO inventory valuation (a)
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- |
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- |
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(112 |
) |
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Other (a)
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- |
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- |
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(160 |
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Net current deferred income tax assets
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- |
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- |
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(272 |
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Net current deferred income tax
liabilities (a)
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- |
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- |
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41 |
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Net deferred income tax liabilities
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4,196 |
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4,005 |
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3,960 |
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| (a) |
Effective 2016, under
ASU 2015-17, deferred
tax assets and liabilities have been classified
as non-current. 2015
was not restated. |
Unrecognized tax benefits
Unrecognized tax benefits reflect the difference between positions
taken or expected to be taken on income tax returns and the amounts
recognized in the financial statements.
The following table summarizes the movement in unrecognized tax
benefits:
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millions of Canadian
dollars |
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2017 |
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2016 |
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2015 |
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Balance as of January 1
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106 |
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132 |
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151 |
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Additions for prior years’ tax position
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2 |
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2 |
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10 |
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Reductions for prior years’ tax positions
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- |
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(18 |
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(4 |
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Reductions due to lapse of the statute of limitations
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- |
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(5 |
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- |
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Settlements with tax authorities
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(30 |
) |
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(5 |
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(25 |
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Balance as of December 31
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78 |
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106 |
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132 |
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The unrecognized tax benefit balances shown above are predominately
related to tax positions that would reduce the company’s
effective tax rate if the positions are favourably resolved.
Unfavourable resolution of these tax positions generally would not
increase the effective tax rate. The 2017, 2016 and 2015 changes in
unrecognized tax benefits did not have a material effect on the
company’s net income or cash flow. The company’s tax
filings from 2010 to 2017 are subject to examination by the tax
authorities. Tax filings from 1998, 2000 and 2003 to 2009 have open
objections and therefore are also subject to examination by the tax
authorities. The Canada Revenue Agency has proposed certain
adjustments to the company’s filings. Management is currently
evaluating those proposed adjustments and believes that a number of
outstanding matters are expected to be resolved in 2018. The impact
on unrecognized tax benefits and the company’s effective
income tax rate from these matters is not expected to be
material.
Resolution of the related tax positions could take many years to
complete. It is difficult to predict the timing of resolution for
tax positions since such timing is not entirely within the control
of the company.
The company classifies interest on income tax related balances as
interest expense or interest income and classifies tax related
penalties as operating expense.
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